The stock market marched higher during the second quarter as central banks continued shifting towards more accommodative monetary policy. This helped offset heightened trade tensions and slower global economic growth data. Once again the result was clear: long-term interest rates continued to decline and risk assets rallied. During the second quarter, the S&P 500® gained 4.3%, the Russell Midcap® advanced 4.1%, and the MSCI EAFE® returned 3.7%. Year-to-date equity returns have been outstanding: 18.5 (S&P 500), 21.4 (Russell Midcap) and 14.0 (MSCI EAFE). Bond returns were also strong during the quarter as longer-dated interest rates declined despite short-term rates remaining pegged near the Fed mandated level. The Bloomberg Barclays Intermediate Gov./Credit Index returned 2.6% and the Bloomberg Barclays Aggregate Index advanced 3.1% during the quarter. Year-to-date the indices have returned 5.0% and 6.1% respectively.

The economic crosswinds during the quarter were apparent as the stock market continued its ascent higher in April, only to reverse course in May and then resume its move higher in June. Trade tensions and slowing global growth caused concern for investors, while central banks signaled a readiness to ease monetary policy to counter any economic weakness. While the equity market took this in stride, the bond market seemed to be signaling that a slowdown is coming. The yield on the 10- year Treasury (which was over 3% last year) briefly slid to under 2%, its lowest level since 2016. Meanwhile, the Federal Funds rate remained at 2.25%-2.50% resulting in a so called “inverted” yield curve—sometimes a harbinger of pending recession. While the yield curve has inverted before nearly every recession, there have been many times when an inversion has not been followed by a recession. The 1990’s is a good example. The yield curve inverted three times (1995, 1998, and 2000) – yet a recession only occurred in 2001–arguably due to significant excesses (tech bubble). So while an inversion may signal slower future growth, a recession is typically also a result of excesses in the system which don’t seem widely apparent today.

Perhaps the most worrying issue during the quarter was increasing trade tensions, particularly with China. Recent economic data indicates the tariffs, which began last summer, are having an impact on imports and consumption along with consumer and business confidence. While the ramifications for the U.S. are largely higher prices and less consumption, the impact to higher export countries (and to overall global economic growth) is more significant. Equally concerning is the impact on the supply chain, as many products produced in the U.S. use parts that are sourced overseas. In addition to increasing prices, uncertainty may delay capital expenditures and erode business and consumer confidence.

The Madison Mid Cap strategy (gross of fees) significantly outperformed the Russell Midcap® Index during the second quarter. The portfolio’s focus on high-quality, growthoriented stocks drove the excess returns as growth stocks outperformed value stocks and low-quality stocks lagged their high-quality peers. Both stock selection and sector allocation were positive contributors to the strong performance.

Stock selection was very strong as your stocks outperformed in every sector in which it had exposure. From a sector allocation perspective, the portfolio was ideally positioned with overweights to the strongperforming Financials and Communication Services sectors and underweights to the market-lagging Energy, Consumer Staples, Real Estate, Health Care and Utilities sectors.

The five top contributors to your portfolio’s quarterly return included: CarMax (24.4%), Arch Capital (14.7%), Liberty Broadband (13.6%), Copart (23.4%), and IHS Markit (17.1%). The five largest detractors included: Alliance Data (-19.6%), O’Reilly Automotive (-4.8%), NewMarket Corporation (-7.2%), Glacier Bancorp (1.8%), and Progressive Corporation (0.1%).

As we navigate this environment of decelerating economic growth, along with central banks that appear supportive of the financial markets, we believe volatility will remain high. While there are few signs of an imminent recession, the economy is not so strong as to be invulnerable and coupled with policy uncertainty warrants caution. With this in mind, we continue to believe our investors are best served by choosing investments based upon time horizon and risk tolerance. This approach, along with investing in stocks of lower-risk, higher-quality companies, and shorter-duration, higher-quality bonds should allow us to participate in the markets, while providing some shelter as market volatility and geopolitical risks persist.